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Tax Alert Vol. 25 - No. 10_23 May 2022
Case law on the claim for industrial building allowance (IBA) and increased export allowance (IEA)
In Ketua Pengarah Dalam Negeri v Classic Japan (M) Sdn Bhd (2022) MSTC 30-476, the Court of Appeal (CoA) overturned part of the decision of the High Court (HC). The CoA concurred with the HC’s position that the taxpayer was entitled to claim IBA as the taxpayer’s factory qualifies as an industrial building under Paragraph 63 of Schedule 3 of the Income Tax Act 1967 (ITA). The CoA however disagreed with the HC’s position that the taxpayer was entitled to claim IEA, as the taxpayer was not directly “engaged in agriculture” per Rule 3 of the Income Tax (Allowance for Increased Export) Rules 1999 (1999 Rules)1. The CoA also disagreed with the HC’s position that the Director General of Inland Revenue (DGIR) had no legal or factual basis to impose penalties under Section 113(2) of the ITA, as the taxpayer had indeed provided incorrect information and failed to declare its income correctly.
An overview of the case and discussion of the issues are set out below.
Overview
The taxpayer is a Malaysian-incorporated company which is in the business of collecting, processing and shipping cut fresh flowers for export to Japan. The taxpayer has been involved in this business since 2006.
The taxpayer purchases fresh flowers from contract growers in Cameron Highlands. In 2006, the taxpayer also built a factory, where processing works (e.g., inspecting, trimming, grading, bunching, cutting, hydrating, packaging etc.) are carried out to ensure the flowers are preserved and meet the necessary standard and quality.
The increased value of the taxpayer’s export of fresh flowers and capital expenditure incurred for the construction of the factory are as follows:
|
Year of assessment (YA) |
Increased export |
|---|---|
|
2007 |
4,753,570 |
|
2008 |
2,908,660 |
|
2009 |
2,231,552 |
|
2010 |
4,470,958 |
|
YA |
Capital expenditure |
|---|---|
|
2007 |
812,400 |
|
2008 |
329,604 |
|
2010 |
18,314 |
The taxpayer claimed IEA and IBA from YA 2007 to YA 2010.
The chronology of events thereafter are as follows:
|
26 July 2011 |
The IRB conducted a tax audit on the taxpayer |
|---|---|
|
10 January 2013 |
The IRB issued two Notices of Assessments (for YA 2008 and YA 2009) and a Notice of Additional Assessment (for YA 2010), including penalties |
|
23 January 2013 |
As the taxpayer did not agree with the assessments, the taxpayer filed an appeal by way of Form Q to the Special Commissioners of Income Tax (SCIT) |
|
8 April 2016 |
The SCIT held that: (i) The taxpayer was not entitled to claim the tax incentive under the 1999 Rules (ii) The taxpayer’s factory is an industrial building within the meaning of Paragraph 63, Schedule 3 of the ITA (iii) The DGIR was entitled to impose a penalty under Section 113(2) of the ITA
Both DGIR and the taxpayer appealed the SC’s decisions to the HC. |
|
2 February 2021 |
The HC delivered a judgment in favour of the taxpayer by allowing the taxpayer’s appeal and dismissing the DGIR’s appeal. The HC held that: (i) The taxpayer was entitled to claim the IEA under the 1999 Rules (ii) The taxpayer’s factory is an industrial building within the meaning of Paragraph 63, Schedule 3 of the ITA, and as such entitled to claim IBA (iii) The DGIR had no legal or factual basis to impose the penalty under Section 113(2) of the ITA The DGIR appealed the HC’s decisions. |
|
The issues for the CoA’s determination were as follows. |
Whether the taxpayer was entitled to claim the IEA under the 1999 Rules
The CoA disagreed with the HC’s position and held that the taxpayer was not entitled to claim the IEA under the 1999 Rules. The CoA referred to the decisions in Dr Koay Cheng Boon v Majlis Perubatan Malaysia [2012] 4 CLJ 445 and Continental Choice Sdn Bhd & Anor v Ketua Pengarah Hasil Dalam Negeri (2021) MSTC 30-453, where it was stated that the purposive approach in interpreting a statute including the tax statute was only applicable if the statute was ambiguous and the purpose approach taken did not cause any injustice or absurdity.
In this case, the CoA found that Rule 3 of the 1999 Rules was unambiguous and ought to be given its literal and ordinary meaning. Under the said Rule, the taxpayer is required to be a company engaged in agriculture, resident in Malaysia and exporting agricultural produce to be entitled to the IEA. The phrase “engaged in agriculture” clearly showed that it required direct involvement in the planting or growing of the fresh flowers, and the mere activity of buying flowers from contract flower growers was not an activity within the meaning of the phrase.
Whether the taxpayer’s factory is an industrial building within the meaning of Paragraph 63 of Schedule 3 of the ITA
The CoA affirmed the decisions by the SCIT and HC and held that the taxpayer’s factory could be categorized as an industrial building, as the building was used for business purposes and to house machinery or plant for the subjection of goods to a process.
The CoA dismissed the IRB’s argument that the taxpayer’s factory was used only to package fresh flowers for export purposes, as there were also other activities / processes (e.g., inspecting, trimming, grading, bunching, cutting, hydrating, packaging etc.) undertaken in the factory.
Whether the HC had correctly held that the DGIR had no legal or factual basis to impose the penalty under Section 113(2) of the ITA
The CoA disagreed with the HC’s position and held that the DGIR had rightfully exercised its discretion to impose a penalty under Section 113(2) of the ITA.
Under Section 113(2) of the ITA, the DGIR is given the discretion to impose a penalty equal to the amount of tax to any person who made an incorrect return or gave incorrect information in its tax return. In this case, the taxpayer had indeed provided incorrect information and failed to declare its income correctly, and the DGIR had only imposed a penalty of 45% of the tax undercharged (instead of the 100% allowable under the law). The CoA was also of the view that the defense of “good faith” (per Section 113(1) of the ITA) had no application with regard to the imposition of penalty under Section 113(2) of the ITA.
1 The 1999 Rules have been revoked and replaced by the Income Tax (Exemption) Order (No. 6) 2019 [P.U.(A) 162]